What is Arbitrage Trading in India and How Does it Work?

The value of crypto assets fluctuates. Prices fluctuate in minutes or even seconds. In comparison to intraday traders, crypto traders must devote more time to technical analysis and price movements. As a result, even minor changes in the market situation can have a significant impact on the value of your assets.

What is arbitrage trading?

Arbitrage was a mainstay of traditional financial markets long before the crypto market emerged. Nonetheless, there appears to be more hype in the crypto scene surrounding the potential for arbitrage opportunities. It is most likely due to the cryptocurrency market’s reputation for being extremely volatile in comparison to other financial markets.

The prices of crypto assets tend to deviate significantly over a given period. Because crypto assets are traded globally across hundreds of exchanges around the clock, arbitrage traders have far more opportunities to find profitable price differences.

A trader would only need to spot a difference in the pricing of a digital asset across two or more exchanges and execute a series of transactions to profit from the difference.

How to do Crypto Arbitrage Strategy? 

The first thing you should remember when engaging in crypto arbitrage is that you are trading in a highly volatile market. As a result, you should do whatever it takes to optimize the speed of your trades before your profit window closes. You can improve speed by sticking to high liquidity exchanges that can instantly match and execute your orders. Trades on low-volume exchanges, on the other hand, may take several minutes to be matched. The arbitrage opportunity may have passed by then.

Things to look out for when you do crypto arbitrage trading

  • Transaction Fees: The first consideration is the possibility of high transaction fees. You don’t want the costs of executing trades and transfers to eat into your profits too much. To mitigate the impact of high transaction fees, you can deposit enough crypto assets on multiple exchanges at the same time. Then, whenever you want to take advantage of a crypto arbitrage opportunity, you can rebalance your portfolio in such a way that you can capitalize on it.
  • Crypto Arbitrage Bot: It is also possible to use bots designed to automate and optimize crypto arbitrage trading. Crypto arbitrageurs should use these tools in conjunction with market inefficiencies trackers. A cryptocurrency arbitrage bot is a computer program that compares prices across exchanges and executes automated trades to profit from price differences.
  • Hot Wallet Risks: Finally, keep in mind the risks associated with hot wallets when engaging in crypto arbitrage. Crypto arbitrageurs are particularly vulnerable to these risks because they must store their crypto assets in wallets provided by cryptocurrency exchanges. As a result, it’s best to limit your activities to reputable and highly secure exchanges as much as possible.

Is crypto arbitrage trading legal in India?

Trading in cryptocurrency is not currently illegal in India. However, arbitrage occurs when you buy/sell cryptocurrency abroad and sell/buy it in India to take advantage of rate changes. It implies the possibility of the use of foreign currency. 

Crypto arbitrage is essential to the overall consistency of the cryptocurrency market. When there are price differentials between exchanges, the trading activities of crypto arbitrageurs will eventually cause the prices of the digital asset across exchanges to converge.

Types of crypto arbitrage trading strategies

There are several ways crypto arbitrageurs can profit off of market inefficiencies. Some of them are:

  • Cross-exchange arbitrage: This is the most fundamental type of arbitrage trading, in which a trader attempts to profit by purchasing cryptocurrency on one exchange and selling it on another.

 

  • Spatial arbitrage: It is a type of cross-exchange arbitrage trading. The only difference is that the exchanges are in different parts of the nation. Trading virtual currencies across two different exchange platforms is referred to as spatial arbitrage. Spatial arbitrage is a simple method of conducting crypto arbitrage. While this is a simple strategy for exploiting price differences, spatial arbitrage exposes traders to risks such as transfer times and costs.

 

  • Triangular arbitrage: Profits can also be made from the uncorrelated pricing of three cryptocurrency pairs on an exchange, particularly when one of the cryptocurrencies is temporarily underpriced on the platform. A trader could, for example, exchange BTC for ETH, then convert the ETH to XRP, and then trade the XRP back to BTC. In summary, this process entails moving funds through BTC/ETH, ETH/XRP, and XRP/BTC pairs to end up with more BTC.

 

  • Decentralized arbitrage: This arbitrage opportunity is common on decentralized exchanges or automated market makers (AMMs), which use automated and decentralized programs known as smart contracts to determine the price of crypto trading pairs. If the prices of crypto trading pairs differ significantly from their spot prices on centralized exchanges, arbitrage traders can swoop in and execute cross-exchange trades involving the decentralized exchange and centralized exchange.

 

  • Statistical arbitrage: To execute arbitrage trades at scale, this combines econometric, statistical, and computational techniques. This method is popular among traders who use mathematical models and trading bots to execute high-frequency arbitrage trades and maximize profit. Trading bots are automated trading mechanisms that use predefined trading strategies to execute a large number of trades in a short period.

Conclusion on Arbitrage Trading in India 

Arbitrage strategies can be even more complicated than cryptocurrency. However, the practice is legal and has the potential to produce high returns while also exposing an investor to high risk.

When considering crypto arbitrage, investors should conduct their research, including looking at different, lesser-known cryptocurrencies and available software to track cryptocurrency exchanges in real-time.

Following the basic crypto arbitrage, best practices and measures outlined above should assist you in making the most of the numerous arbitrage opportunities available in the crypto market today. Get up to 17% APY on your idle crypto deposits by investing through Carret, India’s first crypto savings account.

The prices of cryptocurrencies across multiple markets may differ depending on the supply and demand of a given digital asset at a given time. As a result, this creates crypto arbitrage opportunities for astute traders to capitalize on.